Black Swan, White Swan, Orange Swan, Dead Swan

A Spiral Dynamics Analysis of Risk Assessment

Said E. Dawlabani series published in Medium Winter 2022

financial industry have applied Taleb’s logic to

formulate their own variation on the concept of risk in
Risk and Human Nature order to ease their client’s fears. They simplified the
If you’re looking to buy a new car, you will pay a meaning of a Black Swan event, and its opposite the
substantial premium above its retail price and wait a White Swan in order to provide a layman’s
year for delivery. It’s a chip shortage that won’t be understanding of risky investments. They even
solved any time soon. My neighbor can’t find cat litter introduced the concept of the Grey Swan which is
due to supply chain issues. My other neighbor, a similar to the Black Elephant, a concept made popular
psychologist came out of retirement due to the by journalist Thomas Friedman about the presence of
unprecedented demand for mental health services. I catastrophic risk such as climate change and
received my booster shot, but I must wear a mask again earthquakes that we choose to ignore or live with.
because of the highly contagious Omicron variant. My
favorite coffee shop opens late and closes early due While the phrase Black Swan has become a meme
to a severe labor shortage. Our local grocery store ran among many intelligent people, very few understand it
out of cream cheese three weeks ago and the clerk for what it is. In several interviews since the start of the
can’t tell me when it will be back in stock. My voicemail pandemic, Taleb expressed his frustration with so many
is full of messages from people I never met offering to highly regarded individuals calling the pandemic a
buy my home -sight unseen - for 50% more than its Black Swan event for no other reason than to absolve
market value was two years ago. Inflation, the biggest themselves from responsibility.2 Before this discussion
threat to economic stability was declared dead four goes any further, it’s important to share the full
decades ago but has suddenly been resurrected definition of what a Black Swan event is the way Taleb
terrifying world politicians and central bankers in the first defined it:
process. This is just a sample of many highly
improbable events that are now part of our new A Black Swan is a highly improbable event with three
reality. The world as we know it, looks nothing like it principal characteristics:
did two years ago.
1. It is unpredictable. (There’s no reference to it in
Most of us have heard this before, but it’s worth the modern historic record)
repeating: The COVID-19 pandemic has done the
impossible. It has affected the lives of most people on 2. It carries a massive impact. (Capable of
the planet in a profound and systemic way. It has damage beyond what current systems can
uprooted lives and impacted world economies to the handle)
measure of tens of Trillions of Dollars. It has tested the
nature of global governance and trade and exposed 3. After the fact, we concoct an explanation that
its fragility and shortcomings. It has become the makes it appear less random, and more
disruptor of all disruptors, the mother of all paradigm predictable than it was.3
shifts.

At the beginning of the pandemic, people turned to White Swans and the Levels of Psychosocial
their leaders in disbelief and asked the question: How Development
could you not have foreseen this? I asked myself that
same question as I turned to the developmental models When it comes to measuring risk, on the other end of
that have been at the core of my work for the last two the spectrum from the Black Swan, is the White Swan.
decades and I wrote a widely read piece about it. 1 The characteristics of a White Swan are the opposite
But, the simple question about whether the pandemic of those of a Black Swan. It is a risk event that has little
was preventable or not still needed to be answered. or no impact on institutions or the greater economy due
For that I turned to the work of Nassim Nickolas Taleb, to its full transparency which allows individuals, risk
author of the widely successful book The Black Swan. managers and leaders to fully observe the event
Taleb is a genius statistician who studies the keeping it within the realms of manageability. In the
improbable. He predicted the 2008 financial crisis two business world, when a White Swan event happens,
years before it happened. Since then, many in the damage is limited to the few who can tolerate loss. It is
pg. 1
small in magnitude and the damage is very localized. transparency and the regulation of risk have
Everyone knows the probability of failure in any historically fallen into the greater structure of the fourth
venture and when such failure occurs the ones involved level psychosocial system of human and cultural
deal with it. No adverse implications to the greater development (see summary below. For a full
population. No bailouts, and no subsidies.4 explanation of the cultural development model, please
visit: https://www.memenomics.com/what-is-
White Swan events have existed long before Taleb memenomics ).
defined them in statistical terms and way before the
creation of any modern economic system. They go back The fourth level system is labeled by the color blue. It
to the time when earlier humans learned to assess risk is the foundation stone that gave birth to the modern
from the elements and calculated the possibility of institutions that define a healthy democracy and a fair
death or harm every time they left the safety of their and equitable economic system. This is where
shelter. The definition of risk has evolved as humanity regulatory organizations such as the DOJ, the FDA, the
evolved over the millennia. During the Spanish SEC, the EPA, the FDIC, etc. operate with the mandate
Inquisition, risk avoidance was measured by one’s of keeping society healthy and safe from criminal
loyalty to the church and by minimizing the chance of behavior and the predatory nature of unregulated
appearing as a heretic. capitalism. The more agile and dynamic the fourth level
system is, the more visible White Swan events are and
The Dark Ages eventually gave way to the Age of the lower the possibility of any risk rising to dangerous
Enlightenment and risk assessment moved from religious and systemic levels.
persecution to the scientific measurement and the
mathematical quantification of everything in the world An intelligent regulatory structure knows the difference
around us. between Black Swan events that are mostly
unpredictable and White Swan events that are
We created institutions that regulated risk and allowed to grow due to either incompetence in the
determined what was acceptable for the overall health system or by those who know that outsized windfalls
of a culture or an economy. We banned dangerous favor the risk taker.
and unproven medicines. We created agencies such as
the EPA to minimize the risk of environmental damage.
We created the SEC as a watchdog to keep predatory
behavior of investment bankers and opportunist CEOs
from committing investor fraud and unfairly
manipulating stock prices.

Summary of fourth level psychosocial system as it applies to

macroeconomics.

By the late 1970s that system of values began to

diminish from the American socioeconomic landscape
due to the heavy handedness of its regulatory
All this was in keeping with the necessary need to keep structures and by the beginning of the 1980s much of
White Swan events transparent and knowable. At its ethos became subordinate to the higher and more
every level of human development, transparency was complex values of the fifth level system.
an essential element that helped us assess risk and
implement whatever measures necessary to minimized The theory of Spiral Dynamics states that each value
damage should a risk event evade detection and system in the hierarchy can manifest healthy or
become anything other than a White Swan. unhealthy expressions. The higher the source of the
unhealthy expression is on the Spiral the more systemic
damage it can cause. The task of leaders or regulators
The Slow Death of the White Swan concerned with keeping the frequency of Black Swan
In the macroeconomics model I developed based on the or Grey Swan events to a minimum, is to understand the
Spiral Dynamics theory, the institutions that guaranty motivation of every value system along the entire

pg. 2
Spiral of values and empower the healthy virtues of
each system in order to keep it transparent and in an ****
open evolutionary state while diverting its
corresponding destructive behavior into constructive In the Spiral Dynamics and the MEMEnomics models, a
endeavors. It is a culture-wide partnership among all culture that places the stockholder as its primary
value systems that keeps social emergence healthy and beneficiary is part and parcel of the orange fifth level
systemic risk at bay.5 of psychosocial development. By its very nature the
orange value system represents the triumph of the
When it comes to the macro-design aspects of Spiral scientific and the analytical mind. It is also known as a
Dynamics, once a culture establishes the fourth level manipulative and a reductionist level of development.
system of institutions and moves up the ladder of Any phenomenon that exists outside its worldview,
emergence, smart and agile regulation must move up including risk that is not proprietary to its thinking is left
the ladder as well in order to detect unhealthy and out of its carefully crafted scientific and algorithmic
manipulative behavior emanating from any of the models which mask the appearance of risk and allow
developmental levels that define the first six value White Swans to become what I call Orange Swans. In
systems of psychosocial development. In short, when a my work, it is this phenomenon that has gone unchecked
culture moves beyond the fourth level of development, for over four decades that paved the way to the risks
effective regulation is best approached from the and uncertainties we’re experiencing today.
values of the seventh level system that understands the
motivations of all six lower systems.6 That psychosocial The Whitewashing of Risk by The Smartest Guys
system is part of the emerging values of humanity in the Room
today. It’s designated by the color yellow
Since the end of WWII, the US economy has been
When it comes to the US economy, the fourth level defined by two large wave MEMEnomic Cycles; The
value system was the leading edge of social Patriotic Prosperity Cycle and The Only Money Matters
emergence after the Great Depression. It established Cycle. From the late 1970s to the early 1980s we
all the modern institutions created since the beginning transitioned from the first cycle which represents the
of FDRs New Deal policies. The American Dream was values of the fourth stage of cultural development,
made possible by the physical and institutional defined by the meta-meme of Big Brother knows best
infrastructure put in place by post war development to the second cycle represented by the fifth stage still
plans and the high aspirations of programs like the being defined today by the meta-meme of the smartest
Great Society. In my work, this large wave era is known guys in the room know best. This second wave
as the Patriotic Prosperity Cycle. But by the 1970s penetrated every aspect of American society. Its most
these values of big brother knows best became visible markings were the introduction of Raeganomics,
increasing obsolete in the face of so many geopolitical the ideologies of monetarism, and a new Federal
and economic challenges. The oil embargo, the collapse Reserve bank that replaced the old ways of measuring
of the Bretton Woods financial architecture, the productivity with modern econometrics focused on the
overreach of labor unions, income tax rates that were private sector.
as high as 70%, and the inferiority of American
industrial products are the best examples of what This transition was also marked by a clear departure
caused the system to collapse. Its values became from Keynesian economics which included the role of
resistant to reinvention and reformation, bureaucracy government as a major stakeholder in policy setting.
replace resilience and a different set of metrics with This new era embraced a revived version of the
higher values was needed. Austrian School of Economics called the Chicago School.
The critical thought leader at the Chicago School was
The new system ushered in the era of the scientific mind economist Milton Friedman who liberated monetary
and the values of laissez-faire capitalism. It sought to policy from its boring linear role and made the
deregulate every aspect of the American economy. It corporate stockholder the primary beneficiary of the
placed the fifth level value system as the leading edge new system. In a few short years, the smartest guys in
of social emergence. It replaced the ethos of Big the room were being worshipped as the saviors of the
Brother knows best with a phenomenon I call the smartest capitalist system. Measuring risk moved from a
guys in the room know best. This new big wave is known culturewide assessment of society’s overall health to the
in my work as the Only Money Matters Cycle.7 It made exclusive focus on economics, finance and the corporate
regulation - smart or not- into the enemy and placed bottom line. To those who understood the values of both
the corporate stockholder as its primary beneficiary cycles, the White Swan began to hopelessly lose its
and all other stakeholders in society became much less whiteness. This was America’s entry into a skewed
significant. expression of the fifth level of cultural values, the
pg. 3
orange stage of development. A summary of its Grants that were given as foreign aid were
motivational systems and economic expressions is transformed into loan programs by the World Bank
contained in the table below. and the IMF leaving developing countries in perpetual
debt. We set aside whatever remained of our moral
compass and extracted natural resources from
countries with poor human rights records ruled by
dictators and autocrats. Management gurus introduced
concepts that reduced costs and improved efficiency.
We made a science out of supply chain management,
and mastered concepts like Just-in-time inventory
systems. We expanded global connectivity and set up
factories in countries with the lowest labor costs. We
tamed inflation by removing the cost of food and fuel
from CPI calculations. We did all that while ignoring
the simple fact that in real life, people and factors that
Fat Tails and Orange Swans are left out of this skewed analysis and worldview,
The primary motivation of the orange value system is don’t disappear. Their exclusion or marginalization
to uncover the secrets of our world through scientific contributes to what statisticians call fat tails.
discoveries, research and development, and
quantitative analysis.8 Its intelligence allows it to gain In layman’s language, a fat tail, is a sign that something
the upper hand in setting strategy and the manipulation about a certain data set is wrong. It’s about how the
of facts. It creates a convincing argument to exclude smallest observations in a statistical set come to falsely
everything not deemed relevant to its worldview. But represent the properties of the entire sample. 9 Here’s
when that worldview becomes the pursuit of profit, all a simple example of this: If you were to walk into a
the system’s genius is lost to the corporate bottom line. random Forget Your Troubles bar somewhere in
American and you were to plot the net worth of its 200
Simply put, whatever increased corporate profits was patrons on a bell curve, you are very likely to end up
good and whatever decreased it was bad, and with what statisticians call a normal distribution where
everything else fell away. This became the binary 68.2% of the sample falls within one standard
nature of life. These were the initial pre-requisites for deviation from the mean and 95.45% falls within 2
what I call Orange Swan conditions. The weakening of standard deviations. The probability of someone being
labor unions improved the lot of the stockholder and marginally richer or poorer represent the remaining
since very little else mattered, no blips appeared on 2.28% on each side of the curve represented by the
the risk radar. American jobs were outsourced and two tails on left and right ends as shown on the graph
factories were offshored which improved the balance below. This is what’s called a thin tail. Assessment of risk
sheets of big corporations. Again, no blips appeared in macroeconomic systems, geopolitics, and -in the case
on the risk radar. Financial capitalism replaced of COVID-19- global health, should always produce a
industrial capitalism and, in the process, money became normal distribution with thin tails. This is how the
the tail that wagged the dog of our economy. It placed possibility of a high-risk event is kept to a minimum. In
the measure of productive output at the mercy of a other words, this is how all types of swans remain
financial infrastructure designed by Wall Street observable.
bankers and greedy CEOs. Within a few short
decades, this skewed worldview became the norm.
Information bias, selection bias and an alphabet soup
of other unsound statistical measures passed as science.
This form of manipulation is what I call the ceding of
our greater intelligence to those proclaiming to be the
smartest guys in the room. It is a phenomenon that
spread like wild fire and allowed the orange mind to
hold power, influence and authority over our
sociopolitical landscape and very few could challenge
what appeared to be their genius scientific and https://commons.wikimedia.org/w/index.php?curid=1903871
quantitative approach. In short, they blinded us with
pseudo-science and questionable quantitative Now, imagine Elon Musk walking into that fine
methods. establishment for a beer and suddenly the mean net
worth of every patron in it is in the hundreds of millions

pg. 4
of dollars. While the economic reality of every other
patron in that bar has not changed, the smartest guys in
the room, with a manipulative orange mind want you to
believe that everyone in the tavern is a multimillionaire
and that all decisions pertaining to risk should use that
as their reference. In an economy run by orange minds,
and in the absence of an agile regulatory structure
capable of detecting these fallacies, the entire
economy becomes full of high-risk fat tails that take on
different forms as shown in the graphs below. As
examples of this phenomenon, the light blue graph in
the first image could represent a sampling of a culture Source: https://www.sr-sv.com/the-dangerous-
that accepts the high risk of living near an active disregard-of-fat-tails-in-quantitative-finance/ Retrieved
volcano, or in an area prone to high magnitude 1/15/2022
earthquakes. It could also represent the acceptance of
the risk of doing nothing about climate change. A fat Although I’m not a statistician, my work over the last 15
tail skewed to the right or the left as shown in the years has been about framing the multitude of
second graph represents events where risk is entirely narratives of orange thinkers in terms of the totality of
pushed to one side while the other is left with minimal values in the Spiral Dynamics and MEMEnomics models.
or no exposure. It is the voice of the developmental adult in the room
who sounds the alarm on the absence of resilient
In economics, this represents gains from highly risky regulatory structures while exposing the corrosive
ventures that are privatized (no tail on the left) and effects of an unregulated capitalist system that places
losses that are socialized (fat tail on the right). This is finance and free markets as the sole beneficiaries of
what happened with the bailout of banks in 2008, an irrepressible and splendidly complex society. To be
another sign that absence of effective regulations is at that society again, we must counterbalance the smartest
the heart of fat tail formation. guys in the room with even smarter guys and gals in
Washington.10

After the sardonic laugher dissipates, let that last

sentence sink in for a moment and you will realize how
difficult the road ahead is. A smarter regulator is
someone who possesses seventh level intelligence which
is far more inclusive than the intelligence of a fourth
level regulator and fifth level entrepreneur. It’s
designated by the color Yellow in our model which is
considered by many to represent the emerging values
of our species. It has an unbiased whole systems
worldview that sees all the dysfunction in the six lower
value systems that so far have defined our evolutionary
journey. It plans for long term viability of all
stakeholders represented in our socioeconomic and
governing models all the way to the health of our
planetary ecosystems.11
By Skbkekas - Own work, CC BY 3.0,
https://commons.wikimedia.org/w/index.php?curid=9649146
One of the brightest representatives of that smarter
regulatory system in the US today is Massachusetts
Senator Elizabeth Warren, the most hated and feared
politician by the smartest guys. In 2018 the
Washington Post considered her a top contender for
the 2020 Democratic nomination for President. Shortly
after announcing her candidacy, the Wall Street
establishment summoned the top officials in the
Democratic National Committee to inform them of their
decision to stop all contributions to the entire
Democratic Party should she become their nominee. 12
This is the thin-slicing of our sociopolitical reality; a
diminished fourth level value system that hands the
pg. 5
reins to the fifth level system and in the erode the 3. Riding the Razor’s Edge. Like a balanced
foundation of fairness and opportunity for those who surfer on a crest of a wave, conditions in point
don’t share the corrosive worldview of the orange fifth #2 always straddle the edge of a risk event
level thinker. We need many more Elizabeth Warrens but remain slightly above its tipping point
at every level and every branch of government for us making conditions to the outside world appear
to reach a tipping point where democracy will no normal.
longer at the mercy of the free market.
4. Right Before the Fall. The edge-of-risk model
The Orange Swan Defined described in point #3 gets adopted by
The absence of smart and resilient regulation competitors and other industries resulting in a
contributes to the appearance of all types of fat tails greater likelihood that a risk event will become
in all types of industries and together they form what I systemic and affect the entire economy.
call an Orange Swan. The difference between an
Orange Swan and a Black Swan the way Taleb 5. Gun to the Head of Government. As
describes it, is the degree of unpredictability of high- businesses begin to fail and systemic weakness
risk events. Systemic risk becomes less systemic and a becomes apparent, the smartest guys in the
lot more predictable in the presence of a smart room convince regulators that this is a Black
regulator. It only becomes a Black Swan Swan event caused by random events no one
(unpredictable) in two cases: could have predicted and warn of dire
economic consequences should their activities
1. In the absence of a competent regulatory be regulated.
structure that understands and stays ahead of
financial and free market innovation. The only way to stop an Orange Swan event from
2. If it evades the much bigger radar of a seventh happening is through smart and resilient regulation of
level regulator, placing it more in the realm of economic activities that keep risk from rising to systemic
unpredictable natural phenomenon. levels. It has to come from a much smarter Washington
than the one we have today. In addition, to ensure the
Someone who identifies mostly with the proprietary long-term viability of the system, after an Orange
intelligence and exclusions of the orange fifth level Swan event, regulators must take charge and punish
value system, sees most high-risk events as Black Swans. those responsible, then introduce new laws that prevent
But, someone who possesses the more inclusive and future risk activities that might lead to the formation of
systemic thinking of the seventh level of values sees a new Orange Swan.
most of these events a blips that appear on the orange
risk radar and not the far bigger yellow risk radar and The absence of effective regulation in the long term
therefore terms them as Orange Swans not the more contributes to the occurrence of Orange Swans in
dangerous Black Swans. perpetuity until the system collapses. The incompetent
regulator becomes the coconspirator as regulatory
Here is a list of conditions that define the making of an agencies, one after the other fail to detect the ever-
Orange Swan event as observed by a seventh level increasing sophistication of orange thinking. Institutions
thinker: and regulatory agencies at this stage become
convinced that markets are fully capable of self-
1. Presence of a Passive and Incompetent regulation and begin to advocate that fallacy. This
Regulatory Structure. In the absence of a evolves into the belief that any government intervention
smart and reselient regulatory structure, events in highly sensitive sectors such as finance will impede
that carry high risk are falsely classified as innovation and kill the spirit of free markets.
highly improbable due to the smartest guys in
the room phenomenon. The two figures below from my work demonstrate the
gradual disappearance of fourth level regulation in the
2. Deferring the High Price of Pursuing the face of increased sophistication of the fifth level free
Lowest Cost. To the extent corporations market.13 This inverse relationship has gotten
obsess over optimum efficiency, lowest cost exponentially worse in the last decade as the
and highest profit, is the extent to which they’re traditional smartest guys in the room who represented
contributing to the system’s weakness, linearity the economic intelligence of the Industrial Age are
and fragility. This makes the appearance of being replaced by the much smarter smartest guys in
fat tails and destabilizing wildcards more the room of the Digital Age. As evidence by recent
common. hearings on Capitol Hill, the gap between the regulator
and the innovator has never been so high. 14

pg. 6
 liquidity and a nonexistent regulatory structure would
have had no idea on where to start. As a result, the
bailout enabled banks to continue much of their risky
activity while legally extending their reach into Main
Street and contributing to an ever-increasing gap of
income inequality and economic opportunity.

The financial crisis would have been an opportune time

for a paradigm shift that would have brought back
smart regulation, but by deferring regulatory
responsibilities to those with close ties to the banking
sector, Orange Swan conditions didn’t disappear. They
took on a different form that will eventually reflect in
greater social ills. If seventh level intelligence was
present in our government during that crucial time in
history, it would have thrown the book at highly
leveraged banks, allowed failure to take its natural
course, called attention to fraudulent accounting
activities, then overseen the restructuring of the entire
The 2008 Financial Crisis: Black Swan or banking industry. It would have reinstated a smarter
Orange Swan? version of the Glass Steagall Act with mechanisms that
Imagine our economy instead of being completely detect irregularities in banking activities before they
deregulated was resiliently regulated by the smarter become Orange Swans. But, in a world run by the
guys and gals with seventh level intelligence. This would smartest guys of the fifth level system, this would have
mean that the financial industry would not have been exposed the global economy’s greatest weaknesses,
deregulated in the manner it was. Seventh level the furthest thing from Paulson and Bernanke’s mind.
thinking would have recognized that finance is the
bloodline of an economy and would not have made the Paulson’s singular goal was to save a system that has
fatal mistake the Clinton administration made in the become highly addicted to a sophisticated game of
late 1990s by repealing the Glass-Steagall Act of gambling based on notional valuations. It insnared top
1933 which separated risky activities of investment credit rating agencies and large insurance companies.
banks from normal activities of commercial banks. When it comes to risk assessment the impact of this
cannot be underestimated. In absence of a regulator
The 2008 financial crisis was the culmination of all the who keeps White Swan events observable, the
deregulatory activities that have defined this large- responsibility moved to trusted fourth level structures
wave economic system since the early 1980s. This was like the insurance industry and credit rating agencies
a freight train coming off its tracks helped by the that are in the private sector whose livelihood depends
policies of governments of both George W. Bush and on their unbiased assessment of risk. When these
Barak Obama. In the case of the Bush administration, insurance and credit rating agencies lack the actuarial
the signs of a major financial meltdown appeared way abilities to assess the performance of risky investments
before the failure of investment banking house Lehman like Collateralized Debt Obligations (CDOs),
Brothers in 2008. It was in early 2006 when Wall Mortgage-Backed Securities (MBSs) and a whole
Street saw the early warning signs and knew that when alphabet soup of these types of assets, their own
the house of cards built on risky derivatives and assessments become biased. In some cases, their silence
subprime mortgages collapses, a game plan for their was bought by the large fees they received for
last line of defense, a government bailout must be put underwriting the risk. This type of overt activity muted
in place. This is an example of how Orange Swan the appearance of risk on every form of investment
Condition #5 develops. from the Dubai Sovereign wealth fund to the California
Teachers pension fund and everything in between. This
In a demonstration that proves how orange values - by is an example of how Orange Swan Condition #4
design – have made regulatory structures impotent, develops over time.
and their leaders complicit, Bush appointed none other
than the CEO of Goldman Sachs, Hank Paulson as One of the most indelible images of the 2008 financial
Treasury Secretary. Around the same time, Ben crisis was a desperate Paulson bending on one knee in
Bernanke, a scholar on the causes of the Great front of a gushing Nancy Pelosi begging her to
Depression and a proponent of Friedman’s Monetarism approve the bailout.15 Let that image settle in your
was appointment head of the Federal Reserve. This mind for a minute and you’ll understand how the
was a global emergency that needed immediate
pg. 7
smartest guys in the room are nothing more than paper called the Volcker Rule. It excluded much of his seventh
tigers when the curtain is pulled on their risky activities. level thinking and left risk assessment in the hands of
To understand this better, imagine the gushing orange thinkers who control the system. In the years
regulator is a parent with a drug-addicted child who since, the banking industry sought exemptions to the
runs out of money and comes home holding a gun to his rule and the postponement of its implementation due to
parents’ head threatening to pull the trigger if they the continued presence of large non-performing assets
don’t give him more money to support his addiction. The on their books. By 2020, many parts of the legislation
effective regulator in this case would’ve been the were rolled back and risk took on a different form.
community of supporters who would have anticipated
the addict’s behavior and put in place prevention This chronology of events shows that the initial
measures to begin the rehab process. conditions for a second Orange Swan appeared
immediately after the 2008 financial crisis. Before the
The New Orange Swan appearance of the Coronavirus, investment risk was
Today, we are witnessing the formation of a new reaching new highs but was greatly muted due to
Orange Swan that is a result of a failure to regulate in capital markets having liquidity at historic levels. This
the aftermath of the 2008 financial crisis. Under Bush, allowed asset and debt bubbles of every kind to grow
the smartest guys got what they wanted which set in in every industry. Gone unchecked, this would have
motion Condition #1 for the return to a new Orange resulted in the appearance of a second Orange Swan.
Swan. The window of opportunity was closing and Then came the Coronavirus, a completely unexpected
hopes were high that the Obama administration as it wildcard to the orange mind which burdened the
took over in the middle of the crisis, will usher in a new government and the Federal Reserve with considerably
breed of regulators. In November 2008, President more debt. It made the appearance of a completely
elect Obama formed the President’s Economic different swan possible. I call it the Dead Swan.
Recovery Advisory Board with Paul Volcker at its helm.
Volcker was mostly known for taming runaway inflation ****
in the 1970s and early 80s when he was the head of
the Federal Reserve. But in the Spiral Dynamics - The Age of Euphoria Where Everyone is
MEMEnomics framework, he was a smart regulator with a Genius and Risk is Dead
seventh system intelligence.
Research done using the Spiral Dynamics and the
Volcker was a non-ideologue, a necessary quality for
MEMEnomics models backs the hypothesis that high-risk
seventh system intelligence. He confronted the limits of
Orange Swan conditions have a direct relationship to
Keynesian economics (Blue - fourth system intelligence),
passive or non-existence of effective regulation. To
and resisted Friedman’s “Monetarism” (Orange – fifth
ensure a prosperous and fair economy in the long-term,
system intelligence). He persistently spoke against the
there needs to be new regulatory structures that must
financialization of our economy and the corrosive toll it
be designed from the seventh level value system; an
was taking on the American middle and working
intelligence that is much smarter and more inclusive than
class.16 He was slated to be the new White House
Head of Economic Advisors, but unfortunately, that was the fifth level intelligence of the smartest guys in the
not to be. Both Volcker and President Obama had room. It must serve a diverse group of stakeholders,
underestimated the degree to which the smartest guys not just the stockholder. Among these stakeholders are
the workers who contribute to stockholder value and
in the room have permeated the sociopolitical fabric of
the planet and its ecosystems that make commerce
America. The day President Obama took office,
possible. In short, a smart regulator must expose the
Volcker was replaced by Larry Summers, economic
advisor to the Clinton Administration. It was on his watch fallacy of laissez faire capitalism driven by the
exclusionary values that made finance into the tail that
in the 1990s that the deregulation of banks was
wagged the dog of the economy and manipulated the
completed. Summers also advocated for Congress not
country’s socioeconomic landscape for the last four
to regulate the trading of financial derivatives which
decades.
were the primary cause of the financial crisis.17 Any
hope of escaping a new Orange Swan disappeared
with his appointment.

Within a few months the Obama administration and the

Federal Reserve made available credit facilities to the
extent of $9 Trillion designed to bail out banks and
too-big-to fail enterprise. Congress passed a watered-
down version of Volcker’s proposal to regulate banks
pg. 8
 longest serving chairman by the colloquial saying: “The
job of the Federal Reserve is to know when to remove
the punch bowl at the party.” 19 To understand this in
more common terms, think of that punch bowl as the
bloodline of the economy that provides it with energy
by converting food into simple sugars. Too little sugar
and the body shuts down, too much sugar and the body
becomes sluggish and prone to developing metabolic
syndrome, a precondition for diabetes.

Unfortunately, a prudent monetary policy and a

restrained Fed do not exist today. The ideologies of
monetarism have made it okay for our economy to
The Changing Ecology of the Swan
suffer from metabolic syndrome in perpetuity. In
Before the 1990s, recessions and business cycles were
today’s economic reality, recessions are not allowed to
normal parts of economic activity. They allowed
take on pre 1990s form. With a greatly diminished
markets to naturally recalibrate as economic realities
regulatory structure, no agencies like the RTC can exist.
changed. It was the normal evolution of markets that
The Fed, instead of removing the punch bowl, has
allowed for the most resilient enterprise to flourish and
practiced the ideology of bringing the whole liquor
the least resilient to dissolve. It was natural and
store to the party. These policies overtime became the
transparent but more importantly, it allowed for
toxic waters in which all types of swans swam. They
people who were left out of rising markets the
created a Stockholm Syndrome that falsely
opportunity to acquire assets they wouldn’t have had
transformed risk into riskless opportunity and in the
the chance to in non-recessionary times. This was part
process created bubble economies. The inflated asset
of what made the American Dream possible, especially
was allowed to grow to the point where it became so
when it came to the banking industry. Before the entire
big its failure would have caused a severe economic
industry was deregulated in the 1990s, insolvent
downturn. Because of that it was branded too big to
institutions were placed under government receivership
fail; a label created by the smartest guys in the room to
and their assets disposed of in ways the government
ensure that government bailouts and accommodative
deemed fit and equitable. Back then, the fourth level
Fed policies will always remain on the table. These are
regulator had a say in ensuring fairness in the system.
dangerous conditions that allow Orange Swans to
Government agencies like the Resolution Trust
appear in perpetuity. It is also a confirmation that
Corporation (RTC) played a crucial role in managing
monetarism is a failed ideology that has backed the
assets of failed institutions during the savings and loan
capitalist system into a corner from which there will be
crisis. It redistributed their assets to minority owned
no easy escape. Since the 2008 financial crisis the Fed
businesses, first-time home buyers and a number of
has stood ready to bailout insolvent institutions when
other stakeholders that the savings and loan industry
the next Orange Swan event takes place. It has
would not normally cater to.18
preserved the bailout architecture in the same two
ways it did in 2008.
These were also the days when Fed policies still had a
sense of restrain when it came to the money supply.
1. It will acquire non-performing assets which it
Although the US dollar was no longer tied to the gold
will keep on its balance sheet until such time as
standard, there was still a sense of moral obligation by
when they become marketable securities
Fed governors to make sure that liquidity and its cost
again.
did not decouple from established targets of economic
2. It will buy treasury bonds that enable our
growth while keeping a watchful eye on inflation. These
government to continue its operations and
were the necessary Goldie Locks gauges that made
expand them as needed in order to avoid the
fiat currency an expansive tool that transcended the
onset of a recession.
limits of gold. Governments and central bankers
understood that a cheap and abundant money supply
The problem with the above approach is that the
would cause the economy to overheat triggering
questionable assets the Fed acquired seem to only
inflationary pressures and threats to currency
increase in size, but not become marketable. This is a
devaluation, while expensive money in short supply will
phenomenon common among the central banks of four
cause a recession leading to a possible loss in jobs and
of the world’s largest economies: the US, the EU,
in global competitiveness. The responsibility of a
England and Japan. Before the onset the COVID-19
central bank was to find balance somewhere in the
pandemic these non-performing assets represented an
middle of these two extremes. Many heads of the bank
astounding 36% of these countries combined annual
have reaffirmed this ethos that was summed up by its
pg. 9
GDP. The countries themselves represent over 55% of created new bubbles and made vulnerability to risk
global economic output. The global economy was even greater. More importantly they placed the
becoming increasingly weak and fragile, while the financial systems at a tipping point should an
heads of central banks kept buying these non- exogenous event, or a contagion appear.
performing assets through programs called
Quantitative Easing, a fancy name that muted risk while Dead Swan Defined
making conditions worse. Toxic waters became more A Dead Swan phenomenon is not a risk issue that
toxic and metabolic syndrome became full blown appears in a specific segment of an economy. It’s not
diabetes. Here’s a quote from a piece I wrote grey, black or orange. It begins to form when an
regarding this issue in April 2019: economy becomes addicted to an accommodative
monetary policy. Orange Swans events that rely on
“This is unprecedented and it is more than 12 bailouts are a sign of monetary addiction, and if they
times the post WWII historic average. This appear in perpetuity, they make the system
essentially means that the global economy has increasingly weaker and vulnerable to contagions. A
been living on borrowed time and that the Fed Dead Swan event begins with the poisoning of the
has been in crisis mode since 2008 and must ecosystem in which all types of swans live. It’s the water,
remain in crisis mode for years or maybe the land and the air. It is the bloodline to all segments
decades to come. It has acknowledged defeat of an economy that has been hooked on junk food for
and cannot take its foot off the gas pedal. It is too long. It is unmanaged diabetes that has begun to
in a corner from which the only escape is to keep shut down the different organs of the body. In short, it
doing the same. It cannot raise interest rates for is a state where the tools from the system that created
the fear of crashing stock markets, and it’s it only add to its toxicity. It represents a major
unable to sell the toxic assets it has on its books. paradigm shift when monetary policy reaches stages
It is one big bubble that’s making the global of entropy and the appearance of an exogenous event
economy increasingly more vulnerable to several can pull the plug on the entire system and render it
contagions.”20 dead.

A central bank in perpetual crisis is a sign that an When large exogenous events outside the economic
economy remains vulnerable to a recession brought on and geopolitical radar appear, they can have
by worthless toxic assets. The more toxic the Fed’s devastating effects on economic activity. They give
balance sheet is the more vulnerable we are to Orange governments and central banks the mandate to do
Swan events appearing in perpetuity. The reason we everything in their power to avoid economic collapse.
haven’t experienced one since 2008 is because the These types of events have occurred twice in the last
smartest guys in the room have anticipated movements two decades. The first was the attacks on 9/11, and
of markets and exploited them. the second was the shutdown due to the COVID-19
pandemic. When events of this magnitude take place,
our institutions act from a place of patriotic duty, i.e.,
avoid a sudden economic shock, and deal with the
consequences later. While these types of actions are
necessary to avoid disaster, the events themselves are
the very definition of contagions. With a weakened
monetary system that has struggled to manage the
health of the money supply and can’t reduce interest
rates, contagions of this magnitude can cause the
system to reach critical mass from which there will be
no return. That is the point where central banks throw
money at everything hoping that by some miracle the
They have flooded emerging sectors like the digital system returns to financial prudence.
economy with capital in the hopes that investors shift
their focus away from the bulge of toxic assets. They
helped companies go public without ever showing a
profit. They made speculation normal and created
value where none existed. They made us buy into the
fallacy that disrupting an industry democratizes access
to it when in reality it makes billionaires out of coders
and their investors and adds to economic inequality.21
These strategies born out of a crisis mode, have

pg. 10
 paid to the accommodative policies on money supply.
Both eras experienced advancements in technology
and marked efficiencies in production and
communication. While the 1920’s represented a
paradigm shift from the first Industrial Revolution to the
era of the assembly line and mass production, this era
represents a paradigm shift from the Industrial Age to
the Digital Age. Just as optimism about the future drove
the economic engine in the 1920s, it is also driving the
economic engine of the digital economy today.
Unemployment in both eras reached historic lows and
a roaring stock market driven by historic levels of
liquidity muted the appearance of risk everywhere.

The roaring twenties came to an end with a spectacular

stock market crash in October 1929, which was
The above graph shows how Fed policies change followed by the Great Depression. While many argue
around these events. They’re represented by the that very few similarities remain in today’s globally
sudden spike in the size of assets it acquired around connected economy, many of the fundamentals from
the contagions. The events of 9/11 did not cause a the two eras are eerily similar. They have to do with
Dead Swan event, but by lowering interest rates to the absence of an essential element that guarantees
historic lows, the Fed planted many of the seeds that fairness and shared prosperity in a democratic society.
caused the 2008 financial crisis. It took eight years for It is the absence of effective and smart regulation,
the contagion to work its way through the system. At which in both eras was strategically marginalized over
the beginning of the crisis, the Fed’s total assets were time. In both eras, it took several Republican
around $925 Billion in September, but ballooned to administrations with a dying belief in the free market
$2.24 Trillion in December. The size of that bailout to completely kill regulatory structure. Government
pales in comparison to what the Fed has done and becomes anemic and weak and at the mercy of the
continues to do during the pandemic. As the economy private sector and its lobbyists. Its programs become
shut down the Fed stepped in with a broad mandate to underfunded due to lower taxation including social
save the entire US economy. It made large purchases programs that were part of a safety net for the poor.
of government and mortgage securities, and supported Both eras brought into prominence the extremely rich
lending facilities to help households, employers, and urged the working poor to become just like them.
financial markets, and state and local governments. The Gilded Age of JP Morgan, Andrew Carnegie and
John D. Rockefeller is seen today in the new Gilded
Here are the words of Fed chairman Jay Powell when Age of mega-corporations like Apple, Google and
he introduced these measures: “We are deploying Amazon and in the newly minted Billionaires of Silicon
these lending powers to an unprecedented extent and Valley.
will continue to use these powers forcefully, proactively,
and aggressively until we are confident that we are Greed often begets greed, and just like what
solidly on the road to recovery.”22 So far, these happened in the 1920’s, the banks became involved in
programs have increased the size of the Fed’s assets every aspect of lending. The difference today, is that
by $4.6 Trillion and have allowed an overheated stock the proverbial can known as economic depression, has
market to extend its climb. been kicked down the road. The Fed today instead of
allowing economic cycles to take their natural course,
The Roaring Twenties; A Century Apart they are buying the stairway to a fake eutopia by
purchasing nonperforming assets and hiding them on
The long-term effects of these banking policies are
their bloated book. This was and remains a highly risky
bad, but they’re always masked by rosy short term
practice that makes the entire banking system weak
economic data. They have completed the poisoning of
and prone to contagions.
the waters where risk no longer matters. They have
brought the liquor store to the party and replaced
business acumen with drunken irrational euphoria. They Then came COVID-19 bailout which more than doubled
the size of the Fed’s already bloated balance sheet
made geniuses out of investors who blindly buy stock
without ever having studied their fundamentals. Many placing the banking system at the highest levels of risk
economists compare what is happening today to what since the 1920s. The Fed’s actions since 2020 have
happened in the 1920s.23 Both eras experienced an expedited the poisoning of the water, the land and the
air in which all swans swim, but the marketplace is too
economic boom and very little attention was being
pg. 11
drunk to feel it. In a strange way, it is a confirmation of
what Vladimir Lenin meant when he said: “The best way
to destroy the capitalist system is to debauch its
currency.” The debauchery of currency is near and
when it happens, it will confirm the journey of the Dead
Swan. After the event, the system would need to be
reinvented with several decades of adjustments to new
institutions and regulations with the mandate that
recognizes the spectacular failure on monetarism and
that finance cannot again become the tail that wags
the dog.

******

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